Paying bills on time can get you loans easily

Paying bills on time can get you loans easily

Beginning this year, the Reserve Bank of India has made it
mandatory for each credit bureaus in India to give one free
credit report a year to every consumer who requests one. (You
can read about it here.)
This was done to make people more aware of their credit
health. Following this move, many online financial services
aggregators tied-up with credit bureaus to provide consumers
their credit scores and reports. The catch here being that you
would have to share your personal information, which could later
be used for targeted marketing campaigns (read about it here).

Currently, a host of factors impact your ability to take a
loan. It is common knowledge that your financial behaviour on
existing loans can impact your future ability to take a
loan. However, the role alternative data—apart from financial
behaviour—in this process in being discussed increasingly,
especially at the regulatory level. This could mean that your
social media data, the monthly telephone and utility bills, even
annual insurance premiums could impact your credit history.
However, most people only get to know about their credit scores
or credit health when they approach financial institutions for
loans.

Calculating credit scores now

When you apply for a loan (or credit card), the lending
institution approaches a credit bureau to understand your credit
worthiness. “However, these scores are solely based on a few
underlying data parameters—repayment history on loans and credit
cards,” said Rajiv Raj, co-founder and director, CreditVidya,
which is working on assessing credit worthiness of individuals
through non-traditional means. Currently, “Only transactional
information on loans and credit card repayment is reported to
the credit bureaus.... If you default on a payment—EMI or a
credit card bill—it will have the biggest negative impact on
your credit score,” said Manu Sehgal business development
leader, emerging markets, Equifax India. Even if you don’t
default, delays in paying EMIs or credit card bills will also
impact your credit score negatively.

The amount of credit you utilise also plays an important role.
For instance, if your credit card’s limit is Rs1 lakh and you
often use Rs95,000 of it, it means you are maxing out your
credit constantly and it will impact your credit score
negatively because it would be assumed that “you do not have any
more capacity to take debt,” Sehgal said. Your credit score will
be impacted negatively if you keep applying for loans because it
would be assumed that you are in some financial stress, added Sehgal.

Credit scores in the future

Given the young demographics of our country, about 80% of the
population has never taken a loan and hence does not have a
traditional credit score, Raj said. “In countries like the US,
alternative credit scoring companies identified this gap and
started using information such as telecom data, social media
usage patterns and utility payments...(to) determine the
creditworthiness of individual consumers,” he said.

There are regulations in some countries that bring reporting of
these bits of data into the ambit of credit reporting. For
example, in the US if you do not pay a telephone bill on time,
that is something that a bureau will report on, said Mohan
Jayaraman, managing director, Experian Credit Information
Company of India Pvt. Ltd. “Many countries do this, it is also
on the radar in India. It has been discussed multiple times but
the underlying process is long and complex. This will happen
over time,” Jayaraman said.

Majority of young Indians do not have a formal credit history,
but they do have a record of using telecom services, which could
help them establish their credit worthiness. “The point to note
though is that, is all of this reporting positive for a good
consumer? In the Indian market, the argument is that there are a
billion consumers who have a telephone record, but only a few
million consumers who have a credit card or a loan. If we get
telecoms to start reporting to the bureaus, you will start
getting records of an additional 700 million consumers. In most
of these cases, 95% of the consumers will get the benefit of
positive track records. That’s a good thing for the country,”
Jayaraman said.

However, using social media data may not give very good results
in India, currently at least. The data from social media
profiles and activities of individuals is used mostly to verify
the identity of applicants, their level of education, place of
work and job stability. “Social media activities can help
alternative-lending platforms identify potential borrowers who
do not have easy access to credit through traditional lenders.
In India, the data from social media is weak when compared to
Western countries, thus it could be less predictive,” Raj said.

Even the credit bureaus have examined social data and found it
to be very weak, Jayaraman said. “A lot of alternate
data...around us may be huge amount of hype and very little
reality. It is fashionable to talk about alternative data for
credit decision making. But we find that there are very few
reliable data sources,” he said. “Someone who is socially active
and has a good network does not necessarily translate into a
good credit taker. Also, this whole flow of information is owned
by a certain set of companies and there are a lot of legal
safeguards that prevent someone from accessing it. There is a
whole legality issue,” he said.